Text of the speech delivered by William B. Milam, US Ambassador to
Pakistan, at a seminar arranged by Management Association of Pakistan

The title of my presentation is a question: How does Pakistan fit into
the new global financial architecture? This question immediately elicits two more
questions: 1) what is the new global financial architecture; and 2) in fact, what is
financial architecture?

First, financial architecture is simply the framework of understanding
in which the international financial system operatesits parameters, if you will.
Secondly, the new global financial architecture arose from a retrospective undertaken by
the G-7 in its June 1999 summit in Cologne on what went wrong and caused the new financial
collapse in Asia in the mid 1990's and why it wasn't seen coming earlier. The G-7
concluded that, primarily, loose and non-transparent financial policies, out-of-date
international financial institutions, and weak regulation caused the problem. These
conclusions led the G-7 to endorse a number of reforms to the understandings that govern
how the international financial system should work. These reforms are designed to reduce
the risks of future financial crises and better manage those that occur.

This is not an abstraction; the subject is vitally important to
Pakistan as it labours under a heavy debt burden and is in the process of beginning to
reform and restructure its economic and financial system in ways that move the economy to
higher sustainable growth rates. For Pakistan, this process begins with a new agreement
with the International Monetary Fund (IMF) and follow up agreements with the World Bank
and the Asian Development Bank.

The G-7 recognized that responsibility for maintaining global stability
is shared among the industrial countries, the developing countries, especially those
called emerging markets, and the international financial institutions. The G-7 proposed
reforms are broken down into six broad categories:

 Strengthening and reforming the international financial
institutions,

 Promoting social policies to protect the poor and most vulnerable
elements of society.

Strengthening and reforming the international financial institutions:
The IMF and the World Bank have the central role in the international economic and
financial system. Rather than replace these institutions or create new ones, the G-7
decided to work toward making both institutions more efficient.

It called for enhanced international cooperation in financial market
supervision and surveillance and created a group to work on the implications of highly
leveraged institutions, offshore centers and short-term capital flows.

It also endorsed improving IMF surveillance of exchange rate and
economic policies of member countries and improving IMF transparency. This new
surveillance and scrutiny is apparent in the IMF's recent emphasis on a free market float
of the Pakistani rupee.

Enhancing transparency: The G-7 concluded that the availability
of timely and accurate information was essential for well functioning financial markets
and market economies, both to guide market participants and as an incentive for policy
makers. Here too, Pakistan has experienced a much more rigorous analysis of its financial
data, reserve position and monetary and fiscal policies.

Strengthening financial regulation in industrialized Countries:
The G-7 called on industrialized countries to improve their own financial regulations to
ensure that creditors improve their risk management and risk assessment for lending to
emerging markets. It discouraged investors from using excessive leverage. The G-7 proposed
that private firms strengthen their own risk management and looked forward to ensure that
banking institutions implement adequate risk management practices.

Strengthening macroeconomic policies and financial systems in
emerging markets: Recent financial crises demonstrated the need to strengthen economic
fundamentals and financial systems in emerging economies, to promote their own development
and international and financial stability. Emerging economies should also adhere to sound
principles of debt management and strengthen their financial sectors and supervisory
regimes.

The G-7 called for appropriate exchange rate regimes for emerging
market economies: stability depends on the exchange rate regime being backed by consistent
macroeconomic policies and supported by a robust financial system.

Improving crisis prevention/involving the private sector: One of
the major lessons from the late 1990's financial crisis was that the international
community needed to strengthen its approach to crisis prevention and resolution. The G-7
endorsed the IMF's contingent credit line, which provides member countries with strong
economic policies  a strong precautionary defense against future balance of payments
problems that might arise from international financial contagion. The G-7 proposed a
framework of principles and tools for involving the private sector in the resolution of
crises. The aim was to help promote cooperative solutions between debtor countries and
their creditors and to shape expectations in a way which reduces the risk that investors
believe they will be protected from adverse outcomes.

Promoting social policies to protect the poor and most vulnerable
elements of society: The G-7 noted that social policies are the "cornerstone of a
viable international financial architecture. They supported the identification of
principles and best practices in social policy to protect the poor and most vulnerable.
While recognizing the financial constraints on the abilities of governments to fund social
programmes, the G-7 noted that effective social policy can ease the task of adjustment
during times of crisis and help build support for necessary reforms. The IMF was also
called upon to take into consideration the degree to which its recommended adjustment
programmes provide for adequate spending in the social sector.

What can Pakistan do to fit in?

Open markets: Keeping markets open for goods and capital will
make the economy more resilient to shocks. The benefits and economic opportunities derived
from open markets will lead to significant improvement in living standards in
industrialized and emerging markets alike. We believe the process of globalization offers
great additional potential to create wealth and employment.

Maintain sound macroeconomic policies: The challenge for
Pakistan is to promote financial stability through national action as well as through
enhanced international cooperation. All countries must assume their responsibility for
pursuing sound macroeconomic and sustainable exchange rate policies and establishing
strong and resilient financial systems. It requires the adoption and implementation of
internationally agreed standards and rules to meet the demands of today's global financial
system.

Enhanced transparency: The need is for Pakistan to establish
public authorities to provide for enhanced transparency and disclosure, improved
regulation and supervision of financial institutions and markets, and policies to protect
the most vulnerable. It also requires that private creditors and investors bear
responsibility for the risks that they take.

Sustainable exchange rate policy: Pakistan needs to pursue a
sound and sustainable exchange rate regime. A fixed exchange rate requires Pakistan to
subordinate other policy goals to that of fixing the exchange rate. However, it has been
agreed that the international community should not provide large-scale official financing
for a country intervening heavily to support a particular exchange rate level. Pakistan
should also avoid controls on capital flows, although they may be justified for a
transitional period, because such controls carry costs.

Debt management: Pakistan should work with the IFIs to promote
best practices in debt management. There should be a greater reliance on long-maturity,
and if possible domestic currency denominated, debt to maintain a debt profile that
provides substantial protection against temporary market disruption, avoid transforming
long-term debt into short-term debt.

We hope that Pakistan is able to build upon the standby agreement it
has recently negotiated by next year, agreeing with the IMF to a Poverty Reduction Growth
Facility (PRGF), which is a long-term concessional facility that focuses on long-term
structural reforms.

Pakistan remains dependent on foreign donors and creditors to meet its
financial needs. Even with IFI assistance, Pakistan has run a currant account deficit in
recent years. Both annual debt servicing requirements and the current account deficit have
hovered around 3 per cent of GDP in recent years, while gross external public debt is over
50 per cent of GDP. In addition, defense spending and debt repayments absorb close to 80
per cent of current expenditures.

Promoting social policies to protect the poor: Recent events in
the world economy have underlined the important link between economic and social issues;
and that good economies depend both on stable relationships between governments and their
citizens, and strong social cohesion. An efficient social safety net, by equipping people
for change, builds trust and encourages people to take the risks, which are a necessary
part of a competitive modern market. This in turn helps to mitigate the risks and spreads
the benefits of globalization.

Openness is the overriding theme in this new global financial
architecture  openness which can't be abused because of enhanced standards of
regulation, transparency, surveillance, and policy oversight. How can Pakistan fit into
the new global financial architecture? In essence how can it fit into and prosper from an
increasingly open international financial system? Simple! By embracing openness, welcoming
the competition, maintaining policies and practices which draw in the world's capital
instead of repelling it.

Pakistan's economic performance has been harmed because barriers to the
global economy have resulted in ineffective governance and weak policy implementation.

Pakistan's clear potential for higher growth rates can only be realized
by effective measures to achieve macroeconomic stabilization and increase economic
efficiency.

Can Pakistan fit into the global economy? Time will tell. Meeting IMF
pre-conditions and conditions have positioned Pakistan for renewed lending by the IMF,
other IFIs and set the stage for a possible Paris Club rescheduling. This is a start, and
it could be the beginning of a sustained effort at economic reform and restructuring that
will attract both increased domestic investment and private capital inflows/foreign
investment. The challenge at present is to begin the journey and stay on the road.